Global Economic Issues

Supply Factors

The global financial crisis was primarily caused by demand side factors. However, as the crisis took hold supply side factors became far more important. Significantly, the long term impact of the crisis is likely to be supply side concerns for economies all over the world. This is a problem that will also face Australia.

The financial crisis may have created a long term shortage of tradespeople In the early 1990s, the Australian economy moved into recession. At that time, retention rates in secondary schools increased, particularly for young men. One of the reasons for this is that many boys who traditionally left school to take up a trade were unable to find work in this area. More people stayed on to get an education, but fewer people went on to become carpenters, builders, plumbers and electricians. Not surprisingly, as the supply of these tradespeople decreased the price that we had to pay in order to gain access to these skills increased. Today it is possible for a skilled tradesperson to earn a very high income. With the onset of the financial crisis in 2007, the number of trade positions being offered to young people fell once again. While the impact on school retention rates was not as dramatic this time, the long term impact will be more telling. An economist’s job is to predict the future; the global financial crisis will result in a skills shortage in Australia for many years to come.

To overcome this problem, it would have been helpful to see businesses increase their spending on training, or investment in new technology. Unfortunately with the decline in business confidence spending in these areas fell. The fall in spending during this time meant that it was very difficult for firms to demonstrate an increase in productivity. In fact, both labour productivity and multi-factor productivity recorded almost no change between 2007 and 2009. On the other hand, businesses were able to reduce some of their costs during this period. For example, the total amount paid in wages fell by over $2 billion per quarter between December 2008 and June 2009.

During this period, the Australian dollar responded exactly as economists predicted it would; it depreciated. When the value of the dollar falls, we will often see an increase in exports. Unfortunately the reasons for the decline in the dollar were the very same reasons we did not see an increase in the overall value of our exports; our major trading partners were in recession, and the prices of our key exports were falling. To make matters worse, from a supply side perspective the fall in the value of the dollar at the beginning of 2009 made it far more expensive for firms to purchase imported goods and services. In fact, the positive growth that was seen in the first quarter of 2009 was largely due to the 11% decline in our imports at that time. The problem with this scenario is that it reduces our productive capacity into the future. From a supply side perspective, it is fortunate that the dollar appreciated during the second half of 2009.

It is also true that the crisis resulted in a lack of investment in certain key assets. Many people were surprised that by the end of 2009 it was reported that property prices in Australia had increased during the year. In fact, in the twelve months to December 2009 Melbourne property prices increased by just over 17%. There is a very good supply side reason for this increase; not enough new homes are being built. The lack of supply of available housing has pushed prices higher, and as the government support for first home buyers was wound back and interest rates began to increase, the incentive to build new houses was reduced.

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